Trump's trade talks with China could snap markets out of their funk


Trump-Xi trade talks could spark 'explosion' higher for stocks like Apple – or lead to a bear market

Wall Street is convinced a 'deal' of sorts will be announced after President Donald Trump meets with Chinese President Xi Jinping Saturday night to discuss the trade war that is creating issues for both nations' economies. But the potential outcome could be very different than the truce and ceasefire envisioned by many investors. A desirable deal for stocks would be one where all further tariffs are put on hold while the two sides negotiate an agreement. The best case would be if there is even a roll back of some existing tariffs. International stocks would get the biggest boost, especially those traded in China, the rest of Asia, Australia and Germany, where the DAX index is down almost 13 percent this year, said Peter Boockvar, the chief investment officer at Bleakley Advisory Group. Shares of product makers like Apple could also benefit. "While the U.S. market hopefully will benefit, especially the industrial stocks, it's goods producing stocks that should benefit the most. That would be Apple, specifically," Boockvar said. "But I think there's a potential for overseas markets to benefit most since their economies have softened with these tariffs."

Earlier Friday, there was more negative news for the economy in China, where Shanghai stocks are down about 22 percent year-to-date. China reported factory activity slowed in November to a two-year low. Manufacturing PMI was reported at 50, considered neutral, while a number below 50 shows contraction. Analysts see a range of outcomes this weekend — the trigger for either an "explosion to the upside" or a "bear market." It could also determine whether the stock market ends the year higher or in the red. Boockvar said even if there is a truce that holds off on further tariffs, the existing ones would continue to blur the outlook for corporate earnings and influence the global economy. Economists have forecast growth for the U.S. at about 2.4 percent for 2019, down from 2018's roughly 3 percent pace because of the bite from tariffs and Federal Reserve interest rate hikes. The U.S. currently has 10 percent tariffs in place on $200 billion of Chinese imports. "It's not like we're getting relief. We'd just be getting relief that it's not intensifying. China is still slowing regardless of what happens," said Boocvkar. Analysts have been ratcheting down expectations for earnings growth for next year, to single-digit levels, in part because tariffs are raising production costs. Some analysts see a different scenario in which the two sides plan further talks without halting a plan to increase the China tariffs to 25 percent in January. Strategas puts that as the most likely outcome, with 40 percent odds. The worst case would be if talks broke down altogether, an outcome considered highly unlikely but potentially a very negative event for the stock market. "We would see a rotation back into the defensive consumer staples, health care, utilities, the flight-to-safety type of investments, and then I think we'd have additional worries that maybe this correction becomes deeper or becomes a bear market," said Sam Stovall, chief investment strategist at CFRA.

Stocks were higher but meandering Friday, after gaining sharply during the week. The S&P 500 was up about 4 percent for the week so far but up just 0.5 percent in afternoon trading. Analysts say the outcome is difficult to predict, and Trump's comments have not made it very clear. Reuters quoted a Chinese official in Buenos Aires Friday, saying that "consensus is steadily increasing" in trade discussions, but differences remain. According to Strategas, odds for a deal that includes a ceasefire on further tariffs were about 30 percent. The firm sees even lower odds, 20 percent, for a deal that would include a ceasefire and a roll back in tariffs. They note that China has been considering rolling back tariffs to be more consistent with those in developed countries. "The medium [outcome] is we don't add to tariffs and we don't have the tariffs kick in in 2019. We decide to talk and delay. That's neutral to positive for stocks, and very positive for stocks would be yes, we are talking and we're making headway," said Stovall. Even better would be if there are some roll backs. "Then we get a Powell speech kind of response in the market...You see an explosion to the upside."

Analysts said the stocks that would do best would be those that have been hurt by tariffs — companies that have a relatively high portion of revenue from China or rely on China for parts or manufacturing. That would include industrial and technology companies. In that scenario, Treasury yields could rise and the dollar, which has been rising on trade tensions, would likely weaken against emerging market and other currencies. The Chinese yuan, down 6.7 percent this year, could strengthen. An agreement could prompt a flood of money back into the market on Monday, "a dramatic rally," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "Maybe sterling lags because of Brexit, and maybe the yen lags too because if you buy the emerging markets, you use yen as a funding currency," he said. "The dollar sells off in general, just on a positive surprise." But analysts said it's difficult to handicap what will come of the dinner meeting, during which the two leaders are supposedly making the decision on how to proceed.

As Trump left for the G-20 summit meeting in Buenos Aires on Thursday, he said the two sides were "very close" but added that he wasn't sure he wanted to do a deal. Trump trade adviser Peter Navarro, a China hawk, will also be in attendance, which was taken as a negative by the market. "I think they're going to kick the can down the road for a couple of weeks," said Chandler. A deal could be open-ended, with details on future tariffs left to meetings between negotiators. "That's going to be anticlimactic," Chandler said. "That's going to be hard to trade."